Italy’s culture threatens its economic future

ROME—From a certain angle, the euro crisis looks to be a single crisis, one that reflects the unstable reality of a group of economies that refuse to think and act like a single economy.

But in other ways it is a simultaneous outbreak of different crises in different countries, involving bank failures or a run on government debt or a bursting of a real estate bubble or runaway fiscal or trade deficits.

Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.

Here in Italy, what they have is an endemic productivity crisis, one that has gone on so long and reaches so deep into the economy that it poses a challenge to the fabric of Italian life. Much the same could be said of Greece, Portugal and even France.

In truth, there are two Italian economies, explains Francesco Giavazzi, an economist at Bocconi University in Milan, the leading business and economics faculty in Italy where Prime Minister Mario Monti was once rector.

There’s the one that is composed of several thousand large and medium-size firms, mostly in the northern half of the country, that are innovative, efficient, internationally competitive exporters that generate wealth and high wages and whose productivity and employment have been steadily growing.

And then there is the part, much of it in the south, composed of government, small family companies, government-owned enterprises, utilities, banks and lumbering corporate giants that largely operate in protected or uncompetitive domestic markets. Their productivity has fallen every year for decades.

Add the two together and, on average, what you get is a no-growth Italian economy that cannot support an aging population or generate good jobs or even a good education for young people, let alone maintain the current standard of living for its vast middle class.

Worse still, the trend lines are going in the wrong direction: The unproductive parts are growing while the productive parts — the people and the companies — are moving elsewhere. Since adoption of the euro, Italy’s inflation-adjusted productivity has fallen behind that of Germany’s by about 30 percent. Since the 2008 recession, industrial production in Italy is down by nearly 25 percent.

It was this productivity crisis — not the euro crisis — that Monti was brought in to solve late last year when the Italian political class, in a rare moment of unity and acknowledgment of its dysfunction, ousted Prime Minister Silvio Berlusconi and installed the non-political Monti to finally do something about it.

A successful, if somewhat buffoonish, media entrepreneur, Berlusconi first came to power promising reform of the Italian economy. Aided by a brilliant finance minister, Giulio Tremonti, Berlusconi was even able to make inroads in terms of cutting some taxes, reforming the pension system and, eventually, even reining in budget deficits. But in the end, Berlusconi managed to maintain his hold on power only by buying off the special interests whose primary purpose was to protect the status quo, forcing an increasingly cynical country to finally abandon all parties and politicians in favor of Monti, an honest and largely unknown economist who had won respect as Europe’s top antitrust regulator.

During his first two months in office, Monti pushed through increases in sales, wealth and property taxes to close a widening budget gap. He proposed sweeping deregulation of industries and professions that were closed to new competitors or price competition. He sought an end to Italy’s dual labor market, with its shrinking pool of older, permanent employees who were guaranteed lifetime employment, irrespective of performance, and a growing cadre of younger workers hired on temporary short-term contracts. He accelerated reform of a pension system to push back retirement ages and better tie payouts to contributions. And he began a serious crackdown on Italy’s widespread tax cheating, requiring all large cash purchases to be reported by merchants and sending revenue agents to favorite vacation spots in highly publicized raids. After two months, his favorability rating was more than 70 percent.

It remains a matter of debate whether Monti’s subsequent compromises and backsliding on several of these initiatives led to a sharp decline in his popularity or whether the inevitable decline in popularity emboldened the political parties and special interests to balk at approving them. Some of his most ardent supporters now wonder if Monti made a mistake by not threatening to quit if the political parties that had recruited him didn’t enact his program in total. But even as half-measures, his initiatives are significant reform in a country that has resisted it for so long and remains largely skeptical of the value of competition.

Monti is now trapped in something of a political Catch-22. With elections only a year away, the politicians and established parties know they can stymie further changes by running out the political clock. But if he were to try to extend his electoral mandate by cobbling together a new party — something he originally promised not to do — Monti would run the risk of appearing to be just another scheming politician and jeopardize his still-considerable public support.

One of Monti’s strongest backers is Giuliano Amato, twice a former caretaker prime minister and one of the wise men of Italian politics. Sitting in his frescoed office around the corner from the Pantheon a few days ago, Amato explained that creating a more productive Italian economy will require much more than simply changing laws and regulation. It will mean changing the culture of the country as well.

Bound by family ties

That must start with the family, which dominates Italian business the way it dominates so many other aspects of Italian life.

More than in any other of the advanced economies, business in Italy remains family businesses, from the smallest farms and trattoria to some of the largest supermarket chains, industrial groups and fashion houses. Starting companies comes naturally — Italy remains one of the most entrepreneurial countries in the world. But relatively few grow to be very large, and even those that do tend to remain private, relying on family members to fill all key positions and on retained earnings for capital, supplemented by loans from friendly local bankers.

“The joke in Italy is that the ideal number of shareholders in a company is an odd number less than three,” one Italian financier said.

The positive spin on this insistence on family ownership and control is that it provides the Italian business sector with stability and continuity, even as it ensures the kind of long-term management perspective that is so often wanting in large, public-owned corporations.

We like to think that family businesses also tend to be more loyal to their employees and their communities. But the reality is that Italy’s family-focused business culture is economically limiting. A business-sector-based nepotism over time leads to mediocre management and prevents the best talent from rising to the top. And the refusal to accept risk capital from public shareholders or outside investors limits the ability of the best firms to expand rapidly or achieve globally competitive scale.

The reluctance to distinguish between the firm and the family dampens the ambition of Italian firms. In the mind of many business owners, once they have provided jobs and houses for all the children, bought a family house on Capri or the Dolomites and put away a few million in a Swiss bank account, why take on the risks or hassles of further expansion? In the Italian imagination, skilled and experienced professional managers are likely to put their own ideas or interests ahead of those of the family. And taking on public shareholders requires a loss of privacy and absolute control that most Italian entrepreneurs find unacceptable.

It’s no wonder, then, that the size of the Italian stock market, relative to the size of the country’s economy, is among the smallest in the industrialized world, while neither private equity or venture capital have made many inroads into the Italian market. Most of the country’s considerable savings flow through a clubby network of banks that is as inefficient as it is risk averse, with a decided preference for lending to the government or well-known firms with hard collateral and relationships to bank managers and directors.

In Italy, however, nepotism is hardly confined to family firms. It is the natural order of things that sons go into the same line of work as their fathers, while fathers are expected to secure them a job, whether it is in the Fiat factory or the ministry or any other profession.

Marco Pagano, an economist in Naples, told me that to this day when he runs into many of his parents’ friends, they ask him how things are at the law firm. Pagano has never been a lawyer — his father was, though. Now 60, Pagano says he’s given up trying to convince them that he charted his own path.

Another economist at Bocconi, Tito Boeri, recalls that when a major bank wanted to downsize recently, employees finally relented but only if the bank agreed to hire their children when future slots opened up. “The cultural message of that is terrible,” Boeri says.

Strong family ties also inhibit the flexibility of the country’s labor markets. While Italy has one of the world’s higher home-ownership rates at 80 percent, the way it has worked up to now is that parents tend to buy them for their grown children. That tends to keep children and grandchildren close by, but it also means Italian workers are extremely reluctant to move to those parts of the country where the jobs are.

The absence of a meritocracy is endemic to Italian labor markets. Connections — raccomandazione — remain the surest way to get a job. And even outside the family firm, nepotism is not illegal or unusual. This is particularly true in the education system. Newspapers recently reported that, before retiring, the rector of one of the oldest and most respected universities in Rome appointed his wife, his son and his daughter to the medical faculty, despite an obvious lack of training and experience.

Italians are also wary of meritocracy when it comes to pay. To try to improve the performance of secondary schools, the previous government offered extra money to regions that would agree to offer performance bonuses to their best teachers. There were so few takers that some of the money was never spent. Critics of the experiment argued that the money should be used to induce the worst teachers to do better.

Lack of civic culture

Closely related to the distaste for meritocracy and the obsession with family is the weak sense of a civic culture or virtue in Italy, which expresses itself in everything from the inability to form lines to the ubiquitous graffiti and trash in many southern cities to the widespread tax evasion and persistent strength of the Mafia. The all-too-common Italian attitude is that while taking responsibility for family is fundamental, beyond that, “What can you do?”

This concept of the “amoral family,” first articulated by American political scientist Edward Banfield, may not be surprising for a country that, for 1,500 years after the fall of the Roman empire, was constantly being taken over by one foreign power or feudal state after another. It was perhaps only natural that Italians are inclined to view government as hostile, taxes more like tribute and the court system more an instrument of social control than a source of justice.

The problem, however, is that if people don’t expect each other to be fair and honest, if they don’t trust the government or can’t rely on the courts, if they don’t see that their willingness to wait their turn or throw out their trash will be reciprocated by others — then it’s hard to create an economic environment where highly competitive businesses can grow and prosper.

“You can’t have a modern economy without social capital,” says Sergio Fabbrini, director of the Luiss School of Government in Rome.

A case in point is the judicial system, which by some calculations takes an average of 20 years to impose a criminal sentence or 10 years to resolve a civil dispute. And yet despite this extraordinary backlog, judges routinely take three months off in the summer.

Long vacations, however, are only a small part of the explanation. The bigger part is the insistence on endless appeals of every matter, along with the complexity and endemic contradictions in Italian law. “Ours is a system of lawyers, not laws,” quipped one businessman.

This lack of a civic culture extends even to the upper reaches of Italy’s business elite, who, for the most part, remain removed from the political process and political conversation — a cynical apathy that Italians refer to as qualunquismo. I can’t quite figure whether this stems from aristocratic hauteur or the fetish about privacy or some fear of opening themselves up to attack or scrutiny by the tax authorities. Surely their acquiescence helps to explain why a corrupt and comic Berlusconi was allowed to stay in power as long as he did, even as the economy continued to slide. Now, as Monti struggles to overcome resistance from myriad opponents of liberalization, the absence of vocal support from the business elites is rather striking.

“Our elites are very selfish, very parochial, very self-satisfied,” said one of Italy’s leading journalists. Like many Italians I spoke with, he found it curious that I would even ask about the role played by corporate and professional elites.

Despite all of the legal and cultural impediments, there are thousands of firms that have managed to succeed, making Italy the No. 2 industrial producer in Europe and generating sufficient exports to roughly balance the country’s trade accounts. Because of them, there are parts of Italy that are as wealthy, innovative and productive as the most prosperous regions of France or Germany. The problem is that these companies are too few and their continued growth is often frustrated by the prevailing business culture and the financial requirements of carrying the parts of the country that are economically more like Greece and Portugal. Too many of the best people leave. Too much of the best technology is sold off for a pittance. Too much of the country’s wealth is invested elsewhere.

If Monti is to succeed in his reform efforts, he needs to refocus public and political attention on these globally competitive firms, celebrating their triumphs, channeling capital and talent in their direction and building an economic policy framework around their continued success. Most of all, he needs to enlist their leaders as vocal supporters for his reform agenda and as founding members of a new political and economic establishment.

Without such a changing of the guard, without a cultural and political revolution, it’s hard to see how this lovable and charming bastion of old Europe can emerge from the euro crisis with much hope for its economic future.

“I am not happy to say it, but I am afraid that Italy is doomed to continue on this path of a long, steady decline,” said Roberto Perotti, a leading economist at Bocconi. “What is wrong with Italy is the attitude of the people and the society.”

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